South Africa is a tale of two economies. The legal economy limps along at barely 1% growth and fails to absorb even a fraction of the 12-million unemployed or attract the fixed investment needed to revive industrial job growth. Meanwhile, the illicit economy is booming, growing at more than 6% a year and flooding the country with illegal cigarettes, alcohol, gold, oil and counterfeit goods.
This divergence is the direct and predictable consequence of myopic policy choices that continue under the government of national unity (GNU). At the centre of these choices are repeated, above-inflation excise duty increases on alcohol and tobacco — “sin taxes” — that have widened the price gap between legal products and their illicit counterparts to the point where fair competition is effectively impossible.
Last year, tobacco excise duties on cigarettes, vaping and related products were increased by about 4.75%, while alcoholic beverages faced an average 6.75% excise hike for the current financial year.
We are now paying the price.
The legal market has shrunk so severely that criminals can undercut compliant businesses with impunity. A legal pack of cigarettes now costs at least R35, yet illicit packs can be found just around the corner from parliament – and anywhere else in the country – for R10 or less. In the alcohol sector, an estimated one in five alcoholic drinks sold in South Africa is illicit, mainly because illegal products are almost 40% cheaper than legally compliant alternatives.
Proponents of ever-higher excise duties such as the National Treasury argue that the primary purpose is to reduce consumption for public-health reasons. In theory, this rationale has merit. In practice, without effective enforcement, it collapses entirely. When price increases are not matched by the ability of the government to police borders, supply chains and retail outlets, higher taxes do not curb consumption, they simply change where consumers buy.
When price increases are not matched by the ability of the government to police borders, supply chains and retail outlets, higher taxes do not curb consumption, they simply change where consumers buy
The shift from regulated legal goods to unregulated illicit ones is most pronounced among lower-income households. Illicit cigarettes and alcohol evade quality controls, health warnings and safety standards, and often contain unknown or dangerous substances, posing far greater health risks than their legal equivalents.
South Africa has already tested the consumption-curbing policy logic — and it failed. The Covid-era tobacco ban did not reduce smoking; it turbocharged the illicit cigarette market, entrenched criminal networks and permanently eroded the legal tax base.
The lesson should have been clear: blunt restrictions without enforcement worsen both fiscal and health outcomes. Yet today, the GNU government persists with excise hikes that repeat the same mistake, driving consumers towards cheaper, more harmful illicit products.
The losses to the Treasury itself are staggering. South Africa forfeits more than R30bn a year in tax revenue from alcohol and cigarettes alone and close to R100bn annually across the broader illicit economy. Total excise revenue from cigarettes has fallen from R14bn in financial 2020 to just R9bn in financial 2025.
And the social costs go far beyond government revenue.
The closure of British American Tobacco’s Heidelberg plant, announced in January, is a vivid and tragic illustration. The company will end local cigarette production by the end of this year because the illicit cigarette market has made continued operations commercially unviable. Illicit cigarettes now account for roughly 75% of total cigarette sales, forcing the plant to close.
The direct human cost is clear: about 230 direct jobs are under threat, and perhaps more than 35,000 jobs across the broader value chain — agriculture, logistics, suppliers and services — could be imperilled.
These are breadwinners whose livelihoods depend on a vibrant legal industry. That an established multinational with a 70-year history in South Africa should be forced to leave manufacturing behind reflects not just market failure, but policy failure.
This is why ActionSA voted against the Rates Bill, which included the above-inflation increases in excise duty on tobacco and alcohol, in December. We warned then — and we repeat now — that the tax regime reflected in such legislation empowers the illicit economy while undermining the legal one.
ActionSA will vigorously call for a complete freeze on sin tax increases in the budget to be tabled this month. A pause will give legal businesses a fighting chance to reclaim market share, enable enforcement agencies to catch up, and restore a sense of predictability essential for investment and job creation.
South Africa’s economic challenges — from low growth to high unemployment — demand budget policy that fosters opportunity, not policies that shrink the formal economy and expand the illicit one.
• Beesley is an ActionSA MP and member of parliament’s finance committee
Business Times
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.